The labor market is the strongest it’s been since the pandemic started – and setting up a huge boost to America’s most crucial economic engine

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  • Tumbling jobless claims signal the labor-market rebound is entering full swing as the US reopens.
  • Improved hiring can boost consumer spending, which accounts for 70% of economic activity.
  • Stimulus boosted retail sales higher in March, and a stronger labor market can lift spending further.
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For several months during the pandemic, the labor market lagged other gauges of economic health.

As manufacturers rebounded and Americans spent their stimulus checks, hiring remained stagnant, falling short of a V-shaped recovery as COVID-19 cases surged during the winter.

This was seen in payroll growth – perhaps the most closely watched monthly indicator – which slowed in the fall and even turned negative in December amid increased restrictions. And new filings for unemployment, while down from their early 2020 highs, stayed elevated.

But then came March, and the literal green shoots of spring were accompanied by the figurative indicators of economic recovery.

US payroll growth saw its biggest jump since August, while the unemployment rate declined to a fresh pandemic-era low. The progress has prompted Wall Street titans to adjust their forecasts higher to reflect several months of robust job gains.

Data published Thursday added to the encouraging outlook as jobless claims fell to a pandemic-era low. And with more Americans returning to steady employment, spending – a key driver of economic growth – stands to swing higher.

“The economy, at this point, does seem to be at a bit of an inflection point,” Federal Reserve Chair Jerome Powell said Wednesday, adding that the March jobs report shows what faster growth can look like.

Where hiring accelerates, so does spending

A rapidly healing labor market can be exactly what shifts the recovery into a higher gear. Employment, and the steady income that comes with it, leads Americans to spend more. That spending leads businesses to hire more as they look to service stronger consumer demand.

Consumer spending accounts for roughly 70% of economic activity, and the nature of the coronavirus recession made sales data even more relevant to tracking the recovery. Lockdown measures kept Americans from spending at physical retailers, and the record-high unemployment rate seen at the start of the crisis also cut down on activity.

The government filled in some of the hole with its unprecedented stimulus packages. Retail sales – a popular proxy for overall spending – soared 7.6% in January as people deployed $600 direct payments included in President Donald Trump’s stimulus bill.

That dynamic repeated itself last month. Retail sales surged 9.8% in March to the highest level on record, the Census Bureau said Thursday. The increase is widely attributed to Democrats’ $1.9 trillion stimulus measure, as well as faster vaccination, warmer weather, and relaxed business restrictions.

“The payments were two-and-a-half times bigger than in January, so the consensus forecasts always looked timid,” Ian Shepherdson, chief economist at Pantheon Macroeconomics said, adding sales should rise again in April before trailing as Americans shift spending to non-retail outlets.

Higher employment can also replace stimulus as a steadier boost for spending. While stimulus does swiftly drive spending higher, most of the direct payments go toward saving and paying down debts, according to Federal Reserve research. Last month’s sales data also suggests the stimulus bump fades quickly. After spending jumped in January, it declined 2.7% the following month. Employment, on the other hand, provides the means for more stable consumption.

Economists already incorporated the stronger spending and jobless claims data into their outlooks. JPMorgan’s forecast for March GDP leaped to 1.6% from 0.7% growth, according to its nowcaster model. The firm’s first-quarter growth estimate rose to 4.5% from 3.5%.

The cost of an upward spiral? Inflation

But with stronger consumer demand comes inflation. Price growth has become the indicator to watch as the country edges toward a full recovery. Those opposed to Biden’s spending plans have warned of rampant inflation fueling a new economic downturn. Others view the administration’s stimulus as necessary to avoiding the plodding recovery seen after the Great Recession.

Indicators signal stronger inflation is at the country’s doorstep. The Consumer Price Index – a commonly used gauge of price growth – gained more than expected last month amid the spending surge. To be sure, officials including Fed Chair Powell and Treasury Secretary Janet Yellen have said they expect stronger price growth to be temporary.

But years of elusive inflation dynamics suggest the central bank and the Biden administration have a looser grip on price growth than they’d like.

“Economists don’t fully understand why we’ve had low interest rates and low inflation in the last decade. And that’s problematic because we don’t know under what circumstances that will change,” Laura Veldkamp, professor of economics and finance at Columbia University, told Insider. “The risk is, this is a ton of spending that … will trigger a bunch of inflation. And those high interest rates will mean that this new debt we’re taking on is going to become incredibly expensive to service.”

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Global stocks near record highs after economic data from the US and China highlights robust recovery

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Global stocks were trading near record highs on Friday after US jobless claims tumbled to a pandemic-era low and China said its economy grew 18% in the first-quarter of 2021.

The MSCI Index’s broadest gauge of global stocks edged up 0.05% in early European trade, just slightly lower than Thursday’s record peak.

Futures on the Dow Jones, S&P 500, and Nasdaq whipsawed between gains and losses, suggesting a mixed open when US indices start trading later in the day.

US jobless claims for the week through April 10 fell to 576,000, beating economist expectations of 700,000. That is the lowest unemployment figure since claims soared at the start of the pandemic.

Outperformance of technology stocks led the Nasdaq to gain 1.31% on Thursday, taking it to within half a percent of its record close. Yield on the 10-year Treasury fell 11 basis points on Thursday, before bouncing back to 1.58%.

Key figures released by Chain’s statistics bureau pointed to a continued rebound, but they are perhaps unusually strong in comparison with last year, when the economy contracted in response to the pandemic.

UBS said while investing at all-time highs may be daunting for some, it expects more upside ahead and predicts the S&P 500 could end the year at 4,400, roughly 5% higher than where it is right now.

“As the economic reopening accelerates in the coming months, we believe the bull market remains on a solid footing,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “We maintain a cyclical bias and prefer US consumer discretionary, energy, financials and industrials. We also retain our preference for value versus growth, as well as for small- and mid-caps over large-caps.”

Elsewhere in Europe, the head of Germany’s disease control agency said people need to drastically reduce contact to curb a third wave of coronavirus infections. Cases in the country were up by 31,117 on Thursday – the most since mid-January.

London-based research company Airfinity announced 1 billion doses of COVID-19 vaccines have been made so far. It forecasts the world could produce another billion doses in the next month alone as production ramps up.

London’s FTSE 100 rose 0.4%, the Euro Stoxx 50 rose 0.3%, and Frankfurt’s DAX ignored the health crisis in Germany and rose 0.5%.

Asian markets traded higher on the back of strong Chinese data.

“With the recovery happening as expected, the market anticipates that monetary policy will be normalized, and liquid margins tightened,” said Lynda Zhou, a portfolio manager at Fidelity International. “Overall, market sentiment remains fragile as it tends to react slowly to positive news and quickly to negative news.”

China’s Shanghai Composite rose 0.8%, Japan’s Nikkei rose 0.2%, and Hong Kong’s Hang Seng rose 0.8%

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US weekly jobless claims drop more than expected to 730,000 as economic recovery pushes forward

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  • US jobless claims totaled 730,000 last week, down significantly from the previous week’s revised total of 841,000.
  • The total also comes in below the economist estimate of 825,000 claims.
  • Continuing claims fell to 4.4 million for the week that ended February 13.
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The number of Americans filing for unemployment benefits declined more than expected last week, signaling the labor market recovery is still recovering, albeit at a modest pace.

New jobless claims reached an unadjusted 730,000 for the week that ended Saturday, the Labor Department announced Thursday morning. Economists surveyed by Bloomberg expected the reading to come in at 825,000 claims. Last week’s total is also below the previous period’s revised count of 841,000 claims.

Continuing claims, which track Americans currently receiving unemployment benefits, dropped to 4.4 million for the week that ended February 13. Economists projected continuing claims to decline slightly to 4.5 million.

While down significantly from spring 2020 levels, jobless claims wavered around 800,000 for weeks amid slowed hiring activity. Weekly counts still exceed the 665,000 filings made during the worst week of the financial crisis. And the roughly 80 million claims made since the pandemic hit the US is more than double the 37 million filings seen during the previous downturn.

 

Labor-market indicators haven’t fared as well as some other economic data in recent weeks. Retail sales leaped 5.3% in January, according to Census Bureau data published last week, trouncing the 1% gain expected by economists. The data signals stimulus passed by President Donald Trump late last year efficiently lifted household spending during one of the worst months of the pandemic.

More recently, IHS Markit reported US business activity improved the most in almost six years in a preliminary February reading. The firm’s index of output across the service and manufacturing industries rose 0.1 point to 58.8, marking the strongest rate of growth since March 2015. The bulk of the improvement came from the service sector, while the manufacturing industry continued to expand at a relatively strong pace.

Pandemic data has similarly shown encouraging trends. Daily case counts are less than a third of their early January peak, and hospitalizations have also steadily declined. The US is administering 1.3 million vaccines per day on average and has so far administered 65 million doses, according to Bloomberg data.

The recovery is set to receive a boost from Washington in the coming weeks. House Democrats on Wednesday indicated they’ll hold a floor vote on President Joe Biden’s $1.9 trillion stimulus proposal on Friday. The legislation would then be sent to the Senate, where Democrats aim to pass the bill through budget reconciliation and send it to the president’s desk by March 12.

That timeline would allow for expanded unemployment benefits to continue instead of expiring on March 14. The package also includes $1,400 direct payments, aid for state and local governments, and an increase of the federal minimum wage to $15 an hour.

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